17

My ex-wife has always had issues managing money (mostly spending out of control and endless get rich quick scams) - which is partially why we divorced. As a result, she's had home foreclosure, bankruptcy, eviction (twice, I think), and other fun things that our children had to deal with. Another consequence is a truly horrible credit score. I seriously don't think it can go any lower.

It seems like she's finally hit the rock bottom late last year and seemed to have gotten her act together. It's possible that change came about because she's run out of people to borrow money from, but who knows. The bottom line is that she wants to rebuild her credit. But to rebuild credit, it helps to have credit. As you can imagine, she can't get any credit at all (banks, department store, etc...).

So my ex asked me to cosign on a credit card for her - and she swears up and down that it's gonna be different - just needs a chance to succeed. I am not going to do it.

So how can a person that's at the very bottom of the credit score hierarchy climb their way out of it? Is there some type of low maximum, high interest that is available to people like that? Some other way?

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    I remember your other questions and I am glad you ex is coming to reality. Just a reminder to you (from another Dad) that you cannot and must not co-sign that loan. Your kids need you as an anchor, and you cannot go down that financial hole again. You can help your ex get her financial house back in order, but you shouldn't feel bad if you direct her to an affiliate of the National Foundation for Credit Counseling at nfcc.org. She needs professional help, she might not accept it from you. – MrChrister Mar 19 '13 at 8:31
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    It's good of you to want to help, just remember you are under no reasonable obligation to provide advice. It might be best coming from a professional. – Jeremy Mar 21 '13 at 12:58
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Sorry to hear about your difficult circumstances.

Secured Credit Card

You may want to suggest a secured credit card. These are credit cards that are backed by a deposit that she would place with the credit issuer. The card issuer provides a line of credit backed by the deposit, with a credit limit not greater than the deposit. In this way, the card issuer is not putting any of their own money at risk. These cards are often used by students or high-risk borrowers to establish credit, and function like a normal credit card. This may be a good option for her to establish a history of handling credit responsibly. Given all of the activity you described, it's very likely the process of rehabilitating her credit will take a number of years.

I would strongly recommend that you not assist her in placing the deposit for a secured credit card. If she can't put aside enough money for a deposit (often $500 or less), it's unlikely she'll be able to set aside the money to pay her card statements each month.

Best of luck - I hope things work out well.

  • This is a good idea if she qualifies for a secured credit card. – Sparr Mar 19 '13 at 15:33
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    @Sparr - There are credit unions that have plans just to rebuild credit. It shouldn't be very difficult. – MrChrister Mar 19 '13 at 16:57
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    @MrChrister even those have credit requirements to become a member – Sparr Mar 19 '13 at 18:34
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I've read multiple times that the way to rebuild the credit score is to get a credit card and then have some minor charges on it every month and have them paid in full every month. Old negative events age and this disciplined activity rebuild the score to some not to horrible levels.

Now it's true that it's hard to get reasonably good credit cards when your credit score is poor. Yet it's not necessary to have a good credit card for this case - such things as large credit limit are not needed. All that's needed is a long grace period so that there's no interest between the moment a charge is done and a moment the bill is paid in full at the end of the month. Yes, the card may have rather high interest and rather low credit limit, but it doesn't really matter.

I've read once on MSN Money that people are offered credit even while they're in the middle of bankruptcy, so it's not impossible to get a credit card in the described situation.

Goes without saying that a lot of discipline will be needed to have all this implemented.

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    Good answer. Don't forget that the credit report must be clean to rebuild. Smartly using credit won't help if a person still has accounts in arrears. – MrChrister Mar 19 '13 at 15:31
  • This advice only works for people that can get credit cards at all. Many of us can't. – Sparr Mar 19 '13 at 15:33
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I want to be a bit contrarian here. It may be true that to rebuild credit it helps to have credit, but it's not the most important thing. If your description of your wife's history is correct, the most important thing is to fix her tendency to 'spend out of control', especially on get-rich-quick schemes. She may well be on the way to fixing that, but in those circumstances every source of credit is a temptation to spend. Why put that temptation in her way? Whatever tiny postive effect having a credit card has on her credit score will be wiped out if in six months time she suddenly maxes out that card and can't pay it off.

I don't want to play credit counsellor, and you should get some professional advice, but her credit score will improve by itself if she takes on no new debt, pays off what she has, and cuts up any credit cards she owns.

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I was in the same chicken and egg situation regarding credit cards. I did two things:

  1. I got a credit card from Capital One that had a $60 annual fee in exchange for not caring that my credit history was bad. I used that card to pay for everything to build my credit history back up.
  2. I got a cell phone by putting a $200 security deposit down for a year and paid the bills automatically using the credit card.

Now that I have recent good credit history, Capital One has offered to raise my limit. I assume that it is because my credit score has improved and I can probably now switch to a credit card that doesn't have an annual fee.

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